The member of the Executive Board of the ECB, Fabio Panettaon the occasion of 22nd Annual Conference of the BIS (Bank of International Settlements), stated that “the cryptocurrency ecosystem is riddled by market failures and negative external factors” so “it is bound to experience further turbulence unless adequate regulations are put in place”.
“Cryptocurrencies have been promoted as decentralized alternatives that promise more resilient financial services. However, the reality is that they have not lived up to their promises. Due to their limitations, cryptocurrencies have not developed into an innovative and robust form of finance, but instead they have turned into a deleterious form of finance”. Panetta said.
Bitcoin grows by 12% in one month
The value of the world‘s largest cryptocurrency has increased by more than 12% since the beginning of June. On Wednesday, its Bitcoin price breached $30,000 to hit its highest level since April 14thaccording to data from Coin Metrics.
Bitcoin, daily chart from the beginning of June 2023
Market participants attributed the jump to news that US giant, BlackRock had applied to launch a spot bitcoin exchange-traded fund, which tracks the market price of the underlying asset.
While that may be part of the reason, the outsized move can be attributed to another factor besides the news flow surrounding large institutions that are taking steps to embrace bitcoin or other cryptocurrencies.
The lack of liquidity
This year following high-profile crashes, such as that of FTX, the “market depth” or the depth of the market has remained very low. It is the ability of a market to absorb relatively large buy and sell orders. When the market depth is low and only the big players order to buy or sell digital coins, prices can go up or down significantly, even if the orders are not that big.
According to data analytics company, Kaiko, the liquidity of the bitcoin market has declined by 20% since the beginning of this year. Bitcoin has been one of the hardest hit cryptocurrencies from this point of view.
The lack of liquidity was in part driven by US authorities’ tight regulation of the industry. The Securities and Exchange Commission has sued major exchanges such as Coinbase and Binance.
Cryptocurrencies: small investors do not come back
Another notable feature of the current cryptocurrency market is the low volumes traded across the various exchanges. The daily trading volume in cryptocurrencies currently hovers around 24 billion dollarsaccording to the CoinGecko website.
So it is significantly decreased compared to the beyond $100 billion of overall bitcoin trading volume recorded during the peak crypto rally in 2021, bitcoin hit an all-time high of $69.000.
Big cryptocurrency advocates and investors have been hoping that an anticipated price hike will be enough to entice small investors, known as retail, into the market. But it didn’t happen that way.
“I think trading volumes and price volatility are two of the most significant indicators of cryptocurrency market activity. Both volatility and volumes are at multi-year lows and even a rapid rise in price is not enough to attract traders.” He commented in an interview on CNBC,Clara Medaldirector of research, Kaiko.
In other words, after the collapse, within less than a year of FTX, Three Arrows, BlockFi, Voyager and so many other major players in the sector, it caused a collapse in investor confidence, especially the small ones, who suffered heavier losses.